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Bond Basics: What Are Bonds?
Bond Basics: What Are Bonds? Have you ever borrowed money? Of course you have! Whether we hit our parents up for a few bucks to buy candy as children or asked the bank for a mortgage, most of us have borrowed money at some point in our lives. Just as people need money, so do companies and governments. A company needs funds to expand into new markets, while governments need money for everything from infrastructure to social programs. The problem large organizations run into is that they typically need far more money than the average bank can provide. The solution is to raise money by issuing bonds (or other debt instruments) to a public market. Thousands of investors then each lend a portion of the capital needed. Really, a bond is nothing more than a loan for which you are the lender. The organization that sells a bond is known as the issuer. You can think of a bond as an IOU given by a borrower (the issuer) to a lender (the investor). Of course, nobody would loan his or her hard-earned money for nothing. The issuer of a bond must pay the investor something extra for the privilege of using his or her money. This "extra" comes in the form of interest payments, which are made at a predetermined rate and schedule. The interest rate is often referred to as the coupon. The date on which the issuer has to repay the amount borrowed (known as face value) is called the maturity date. Bonds are known as fixed- income securities because you know the exact amount of cash you'll get back if you hold the security until maturity. -
Principal Investment Strategy Main Risks
Class Investor I Y PORTFOLIO TURNOVER Ticker DHRAX DHRIX DHRYX The fund pays transaction costs, such as commissions, when it Before you invest, you may want to review the fund’s Prospectus, which buys and sells securities (or “turns over” its portfolio). A higher contains information about the fund and its risks. The fund’s Prospectus and portfolio turnover rate may indicate higher transaction costs and Statement of Additional Information, both dated February 28, 2021, are may result in higher taxes when fund shares are held in a taxable incorporated by reference into this Summary Prospectus. For free paper or account. These costs, which are not reflected in annual fund electronic copies of the fund’s Prospectus and other information about the operating expenses or in the Example, affect the fund’s fund, go to http://www.diamond-hill.com/mutual-funds/documents.fs, email a performance. During the most recent fiscal year, the fund’s request to [email protected], call 888-226-5595, or ask any financial portfolio turnover rate was 28% of the average value of advisor, bank, or broker-dealer who offers shares of the fund. its portfolio. Investment Objective Principal Investment Strategy The investment objective of the Diamond Hill Core Bond Fund is to maximize total return consistent with the preservation of Under normal market conditions, the fund intends to provide capital. total return by investing at least 80% of its net assets (plus any amounts borrowed for investment purposes) in a diversified Fees and Expenses of the Fund portfolio of investment grade, fixed income securities, including This table describes the fees and expenses that you may pay if bonds, debt securities and other similar U.S. -
The Synthetic Collateralised Debt Obligation: Analysing the Super-Senior Swap Element
The Synthetic Collateralised Debt Obligation: analysing the Super-Senior Swap element Nicoletta Baldini * July 2003 Basic Facts In a typical cash flow securitization a SPV (Special Purpose Vehicle) transfers interest income and principal repayments from a portfolio of risky assets, the so called asset pool, to a prioritized set of tranches. The level of credit exposure of every single tranche depends upon its level of subordination: so, the junior tranche will be the first to bear the effect of a credit deterioration of the asset pool, and senior tranches the last. The asset pool can be made up by either any type of debt instrument, mainly bonds or bank loans, or Credit Default Swaps (CDS) in which the SPV sells protection1. When the asset pool is made up solely of CDS contracts we talk of ‘synthetic’ Collateralized Debt Obligations (CDOs); in the so called ‘semi-synthetic’ CDOs, instead, the asset pool is made up by both debt instruments and CDS contracts. The tranches backed by the asset pool can be funded or not, depending upon the fact that the final investor purchases a true debt instrument (note) or a mere synthetic credit exposure. Generally, when the asset pool is constituted by debt instruments, the SPV issues notes (usually divided in more tranches) which are sold to the final investor; in synthetic CDOs, instead, tranches are represented by basket CDSs with which the final investor sells protection to the SPV. In any case all the tranches can be interpreted as percentile basket credit derivatives and their degree of subordination determines the percentiles of the asset pool loss distribution concerning them It is not unusual to find both funded and unfunded tranches within the same securitisation: this is the case for synthetic CDOs (but the same could occur with semi-synthetic CDOs) in which notes are issued and the raised cash is invested in risk free bonds that serve as collateral. -
Chapter 06 - Bonds and Other Securities Section 6.2 - Bonds Bond - an Interest Bearing Security That Promises to Pay a Stated Amount of Money at Some Future Date(S)
Chapter 06 - Bonds and Other Securities Section 6.2 - Bonds Bond - an interest bearing security that promises to pay a stated amount of money at some future date(s). maturity date - date of promised final payment term - time between issue (beginning of bond) and maturity date callable bond - may be redeemed early at the discretion of the borrower putable bond - may be redeemed early at the discretion of the lender redemption date - date at which bond is completely paid off - it may be prior to or equal to the maturity date 6-1 Bond Types: Coupon bonds - borrower makes periodic payments (coupons) to lender until redemption at which time an additional redemption payment is also made - no periodic payments, redemption payment includes original loan principal plus all accumulated interest Convertible bonds - at a future date and under certain specified conditions the bond can be converted into common stock Other Securities: Preferred Stock - provides a fixed rate of return for an investment in the company. It provides ownership rather that indebtedness, but with restricted ownership privileges. It usually has no maturity date, but may be callable. The periodic payments are called dividends. Ranks below bonds but above common stock in security. Preferred stock is bought and sold at market price. 6-2 Common Stock - an ownership security without a fixed rate of return on the investment. Common stock dividends are paid only after interest has been paid on all indebtedness and on preferred stock. The dividend rate changes and is set by the Board of Directors. Common stock holders have true ownership and have voting rights for the Board of Directors, etc. -
3. VALUATION of BONDS and STOCK Investors Corporation
3. VALUATION OF BONDS AND STOCK Objectives: After reading this chapter, you should be able to: 1. Understand the role of stocks and bonds in the financial markets. 2. Calculate value of a bond and a share of stock using proper formulas. 3.1 Acquisition of Capital Corporations, big and small, need capital to do their business. The investors provide the capital to a corporation. A company may need a new factory to manufacture its products, or an airline a few more planes to expand into new territory. The firm acquires the money needed to build the factory or to buy the new planes from investors. The investors, of course, want a return on their investment. Therefore, we may visualize the relationship between the corporation and the investors as follows: Capital Investors Corporation Return on investment Fig. 3.1: The relationship between the investors and a corporation. Capital comes in two forms: debt capital and equity capital. To raise debt capital the companies sell bonds to the public, and to raise equity capital the corporation sells the stock of the company. Both stock and bonds are financial instruments and they have a certain intrinsic value. Instead of selling directly to the public, a corporation usually sells its stock and bonds through an intermediary. An investment bank acts as an agent between the corporation and the public. Also known as underwriters, they raise the capital for a firm and charge a fee for their services. The underwriters may sell $100 million worth of bonds to the public, but deliver only $95 million to the issuing corporation. -
Understanding the Z-Spread Moorad Choudhry*
Learning Curve September 2005 Understanding the Z-Spread Moorad Choudhry* © YieldCurve.com 2005 A key measure of relative value of a corporate bond is its swap spread. This is the basis point spread over the interest-rate swap curve, and is a measure of the credit risk of the bond. In its simplest form, the swap spread can be measured as the difference between the yield-to-maturity of the bond and the interest rate given by a straight-line interpolation of the swap curve. In practice traders use the asset-swap spread and the Z- spread as the main measures of relative value. The government bond spread is also considered. We consider the two main spread measures in this paper. Asset-swap spread An asset swap is a package that combines an interest-rate swap with a cash bond, the effect of the combined package being to transform the interest-rate basis of the bond. Typically, a fixed-rate bond will be combined with an interest-rate swap in which the bond holder pays fixed coupon and received floating coupon. The floating-coupon will be a spread over Libor (see Choudhry et al 2001). This spread is the asset-swap spread and is a function of the credit risk of the bond over and above interbank credit risk.1 Asset swaps may be transacted at par or at the bond’s market price, usually par. This means that the asset swap value is made up of the difference between the bond’s market price and par, as well as the difference between the bond coupon and the swap fixed rate. -
Bond Arithmetic
Debt Instruments Set 2 Backus/Octob er 29, 1998 Bond Arithmetic 0. Overview Zeros and coup on b onds Sp ot rates and yields Day count conventions Replication and arbitrage Forward rates Yields and returns Debt Instruments 2-2 1. Why Are We Doing This? Explain nitty-gritty of b ond price/yield calculations Remark: \The devil is in the details" Intro duce principles of replication and arbitrage Debt Instruments 2-3 2. Zeros or STRIPS A zero is a claim to $100 in n p erio ds price = p n t + n t j j Pay p Get $100 n A spot rate is a yield on a zero: 100 p = n n 1 + y =2 n US treasury conventions: { price quoted for principal of 100 { time measured in half-years { semi-annual comp ounding Debt Instruments 2-4 2. Zeros continued A discount factor is a price of a claim to one dollar: p 1 n d = = n n 100 1 + y =2 n Examples US treasury STRIPS, May 1995 MaturityYrs Price $ DiscountFactor Sp ot Rate 0.5 97.09 0.9709 5.99 1.0 94.22 0.9422 6.05 1.5 91.39 0.9139 2.0 88.60 0.8860 6.15 Debt Instruments 2-5 3. Comp ounding Conventions A yield convention is an arbitrary set of rules for computing yields like sp ot rates from discount factors US Treasuries use semiannual comp ounding: 1 d = n n 1 + y =2 n with n measured in half-years Other conventions with n measured in years: 8 n > > 1 + y annual comp ounding > n > > > > > kn > > 1 + y =k \k" comp ounding n > > < ny n e continuous comp ounding k !1 d = n > > > > 1 > > 1 + ny \simple interest" > n > > > > > : 1 ny \discount basis" n All of these formulas de ne rules for computing the yield y from the discount factor d , but of course they're all n n di erent and the choice among them is arbitrary. -
Index Guideline
INDEX GUIDELINE Solactive SEK IG Credit Index Family 04 June 2020 Index Guideline TABLE OF CONTENTS Introduction .............................................................................................................................................................................................................................. 3 1. Index Specifications ................................................................................................................................................................................................... 4 1.1. Scope of the Index ................................................................................................................................................................................................ 4 1.2. Identifiers and Publication ................................................................................................................................................................................ 5 1.3. Initial Level of the Index ..................................................................................................................................................................................... 6 1.4. Prices and calculation frequency ................................................................................................................................................................... 6 1.5. Licensing................................................................................................................................................................................................................. -
Federal Home Loan Banks Consolidated Bonds and Consolidated Discount Notes (With Maturities of One Day Or Longer)
INFORMATION MEMORANDUM Federal Home Loan Banks Consolidated Bonds and Consolidated Discount Notes (with maturities of one day or longer) The terms “we,” “us” and “our” as used throughout this Information Memorandum mean the Federal Home Loan Banks (the “FHLBanks”), acting by and through the Office of Finance, a joint office of the FHLBanks (together with its successors and assigns, the “Office of Finance”). We may offer consolidated bonds (the “Bonds”) and consolidated discount notes (the “Discount Notes” and, together with the Bonds, the “Securities”) pursuant to this Information Memorandum (as defined herein) and, in the case of the Bonds, a Pricing Supplement or an Offering Notice (each, a “Supplement”) that will contain the specific terms of, and pricing details for, each particular issue (sometimes referred to as “series”) of Bonds. The Securities will constitute joint and several unsecured general obligations of the FHLBanks. No person other than the FHLBanks will have any obligations or liability with respect to the Securities. The Securities will be denominated in U.S. dollars or as may otherwise be specified by us at the time of issue in the applicable Supplement (the “Specified Currencies”). There is no specific limit on the aggregate principal amount of Securities that we may issue. The Securities will have maturities of one day or longer from the date of their original issuance. The Bonds will bear interest as set forth in the applicable Supplement. Principal payments on the Bonds may be made periodically or only at maturity. Any index or formula used to determine the principal or interest payable on the Bonds will be set forth in the applicable Supplement. -
Not for Reproduction Not for Reproduction
Structured Products Europe Awards 2011 to 10% for GuardInvest against 39% for a direct Euro Stoxx 50 investment. “The problem is so many people took volatility as a hedging vehicle over There was also €67.21 million invested in the Theam Harewood Euro time that the price of volatility has gone up, and everybody has suffered Long Dividends Funds by professional investors. Spying the relationship losses of 20%, 30%, 40% on the cost of carry,” says Pacini. “When volatility between dividends and inflation – that finds companies traditionally spiked, people sold quickly, preventing volatility from going up on a paying them in line with inflation – and given that dividends are mark-to-market basis.” House of the year negatively correlated with bonds, the bank’s fund recorded an The bank’s expertise in implied volatility combined with its skills in annualised return of 18.98% by August 31, 2011, against the 1.92% on structured products has allowed it to mix its core long forward variance offer from a more volatile investment in the Euro Stoxx 50. position with a short forward volatility position. The resulting product is BNP Paribas The fund systematically invests in dividend swaps of differing net long volatility and convexity, which protects investors from tail maturities on the European benchmark; the swaps are renewed on their events. The use of variance is a hedge against downside risks and respective maturities. There is an override that reduces exposure to the optimises investment and tail-risk protection. > BNP Paribas was prepared for the worst and liabilities, while providing an attractive yield. -
BASIC BOND ANALYSIS Joanna Place
Handbooks in Central Banking No. 20 BASIC BOND ANALYSIS Joanna Place Series editor: Juliette Healey Issued by the Centre for Central Banking Studies, Bank of England, London EC2R 8AH Telephone 020 7601 3892, Fax 020 7601 5650 December 2000 © Bank of England 2000 ISBN 1 85730 197 8 1 BASIC BOND ANALYSIS Joanna Place Contents Page Abstract ...................................................................................................................3 1 Introduction ......................................................................................................5 2 Pricing a bond ...................................................................................................5 2.1 Single cash flow .....................................................................................5 2.2 Discount Rate .........................................................................................6 2.3 Multiple cash flow..................................................................................7 2.4 Dirty Prices and Clean Prices.................................................................8 2.5 Relationship between Price and Yield .......................................................10 3 Yields and Yield Curves .................................................................................11 3.1 Money market yields ..........................................................................11 3.2 Uses of yield measures and yield curve theories ...............................12 3.3 Flat yield..............................................................................................12 -
Emu and Market Conventions: Recent Developments
ISDA International Swaps and Derivatives Association, Inc. EMU AND MARKET CONVENTIONS: RECENT DEVELOPMENTS 1. Introduction On 16th July, 1997, ISDA, along with a number of other trade associations, Cedel and Euroclear, published a joint statement on market conventions for the euro. That joint statement was subsequently supported by both the European Commission and the European Monetary Institute (now the European Central Bank). The joint statement was intended to focus attention on the need to establish a set of market conventions for the euro. Conventions of the type dealt with in the joint statement tend to differ between currencies, largely for historical rather than valid market reasons. It was inconceivable that the new single currency should itself suffer from the mixture of market conventions which apply to the various national currencies that it is due to replace. At the time of publication, the joint statement reflected a broad market consensus view on what standard market practice should be for new euro-denominated transactions entered into after 1st January, 1999. It also advocated that for "legacy" instruments or transactions (those entered into before 1999 in national currency units or the ECU, but maturing after 1st January, 1999) which incorporated the old national currency conventions, no change should be made to update the conventions. The purpose of this memorandum is to bring the issue of harmonised market conventions for the euro up to date in light of developments that have taken place since the publication of the joint statement over a year ago. A summary of the proposed market conventions for the euro financial markets is attached as Exhibit 1.